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CRE Financing Gets Harder To Obtain, More Expensive

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Before the coronavirus pandemic struck in March, Colliers' Bob Beckman would provide lenders with copies of financial statements and tax returns when he was seeking financing.

That's no longer enough.

"I have had to go an extra step in underwriting, getting bank statements from my sponsors and circling and showing rent payments that have been received since COVID started," Beckman, a senior finance director based in Philadelphia, said in an interview.

Lenders want property owners to have more skin in the game as they look to limit their risks. As a result, the cost of capital is going up. Beckman estimates that loan-to-value ratios have fallen about 5% while debt service coverage ratios are on the rise. Average LTVs now are about 75%-80% in multifamily, 70%-75% in industrial and 65%-70% in retail and office, he said. Moreover, appraisers are making adjustments to their valuations, adding more hurdles for property owners to clear.

"Underwriters are much, much less apt to take a flyer on any kind of deal with any hair on it," Beckman said. "Certainly, the fundamental of any loan request has to be pretty strong."

The Green Street Commercial Property Price Index is down 11% this year, led by declines in pricing of hospitality and malls. Delinquencies on commercial mortgage-backed securities deals hit a near all-time high of 10.3% in June, according to TreppGoldman Sachs expects delinquencies to top 11% in July, according to MarketWatch

The industry-backed CRE Finance Council is lobbying the Trump administration to inject $250B to $300B into the commercial real estate sector to enable owners to cover 12 months of debt service payments, plus pay operating expenses and taxes. 

"[The pandemic has] thrown a wrench in things in a lot of ways," Rittenhouse Realty Advisors transaction manager William Patton III said. "The bottom line for our clients is that the risks and uncertainties in this post-COVID world are increasing the cost of capital and leading to more stringent underwriting requirements."

Sometimes it's not just about financing becoming more difficult — "it's making certain lenders unwilling to deploy any capital at all," Patton said.

Debt funds and nonbank lenders are willing to fund projects at premium interest rates ranging from 7%-12%, payable over one to three years, according to Patton. Getting financing on construction loans remains a challenge for many developers, some of whom are having to borrow at 60% LTV.

"On the construction end, you are going to need to be well-capitalized or have a strong relationship with your lender and have a proven track record or else it’s going to be really hard for you to get a construction loan," Patton said. "The rent growth assumptions are going to be much more conservative. Some people are underwriting to post-[Philadelphia’s 10-year tax] abatement value, so that is putting the squeeze on valuations."